French Bonds Drop Before Election as Italian Debt Slides

French bonds declined, sending 10-year yields to the highest in almost three months, as investors braced for tomorrow’s election amid concern that European policy makers are failing to contain the region’s debt crisis.

Italian 10-year bond yields rose for a sixth week, the longest run since November, as Prime Minister Mario Monti pushed back his balanced-budget goal. France will hold the first of two rounds of votes to choose a president, with Socialist Francois Hollande seeking to replace Nicolas Sarkozy. The rise in France’s yields reflects investor concern that Hollande may relax the nation’s deficit-tackling policy if he takes office, according to Charles Diebel, head of market strategy at Lloyds Banking Group Plc.

“The French election is going to keep people nervous, particularly with comments Hollande is making,” London-based Diebel said. “With a number of risk events ahead of us, the market is going to re-challenge policy makers.”

French 10-year yields advanced 13 basis points, or 0.13 percentage point, from last week to 3.08 percent at 4:06 p.m. London time yesterday. That’s the biggest increase since the five days ended Jan. 6. The extra yield investors get for holding the securities instead of German bunds rose to as much as 149 basis points, the most since January. The price of the 3 percent securities due in April 2022 fell to 99.33 from 100.43.

Italian 10-year bond yields rose 13 basis points to 5.65 percent. The rate on benchmark 10-year German bunds slipped two basis points to 1.72 percent.

Credit Rating

French debt also declined after Citigroup Inc. said it expected the nation’s credit rating to be cut over the next two-to-three years. Barclays Plc advised clients to bet French 10-year bonds will underperform their Finnish and Austrian counterparts because any new policies introduced after the vote are unlikely to be “bold” enough to boost the securities.

German securities may fall next week before the country sells 3 billion euros ($4 billion) of bonds maturing in July 2044 on April 25. Italy and the Netherlands will also hold auctions for their securities next week.

German debt is the best performer among euro-region securities this month, handing investors a 0.95 percent gain compared with a 1.17 percent loss from French securities, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish bonds underperformed all their counterparts with a 2.67 percent decline.

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